IMF Mission Statement at the Conclusion of the 2004 Article IV Consultation and Post-Program Monitoring Discussions with the Philippines

The following statement was issued today in Manila by an International Monetary Fund (IMF) staff mission:

"The 2004 Article IV and post-program monitoring mission took place from November 3-17, 2004. The discussions focused on the macroeconomic and structural policy issues facing the Philippines. The mission's findings will be reported to the IMF Executive Board in February 2005, but the preliminary assessment is as follows:

"Since taking office in July, the new administration has formulated a package of reforms to address fiscal, power, and banking sector issues. The authorities are to be commended for their initial focus on legislative tax measures and efforts to bring these quickly for congressional approval. Early implementation of high quality measures is required to reassure investors, and the increase in generation tariffs provisionally awarded to the National Power Corporation (NPC) in September is the first major step in this regard. However, the legislative process for the administration's proposed tax measures is still at an early stage, and some of these measures are proving to be contentious. This has led to signs of impatience in financial markets, with sovereign spreads edging up and ratings agencies warning of possible downgrades.

"GDP growth has been robust in 2004, but is expected to moderate in 2005. Inflation, which has risen sharply this year, looks set to breach the target in 2004-2005. The National Government budget is on track in 2004, thanks to the authorities' tax administration efforts and tight expenditure control. Nonetheless, the broader public sector deficit is projected to be largely unchanged this year, and public sector borrowing requirements remain large, leaving the Philippines vulnerable to sudden changes in market sentiment. The outlook for exports and global oil prices is also highly uncertain. Combined with the possibilities for ratings actions, these uncertainties highlight the case for rapid implementation of the government's reform agenda.

"The mission recommends that strong up-front fiscal adjustment be taken in 2005. A large initial reduction in the deficit would send a strong signal to the markets of the authorities' commitment to balancing the budget. However, while the authorities' goal of raising P80 billion in new tax revenues is key to the fiscal effort, only a small fraction of this amount so far appears assured. To date, only one tax measure with a clear revenue impact—higher alcohol and tobacco taxes with an estimated yield of P7 billion—has been passed by the House. Given how lightly these products are taxed in the Philippines, the revenue impact of this version of the measure seems fairly small. The mission looks forward to a further strengthening of this measures as well as the passage of more substantive revenue-raising measures in the coming months.

"The pickup in inflation is due, to a considerable degree, to supply-shocks to particular commodities, and the BSP has refrained from tightening monetary policy until signs of more generalized inflation emerge. However, in the mission's view, there is some evidence suggesting that price pressures may be spreading and the BSP is appropriately keeping developments under review.

"In other policy areas, the mission believes that the power sector rate increase should be complemented by the prompt privatization of transmission and generation assets. Further, the protections and powers of bank supervisors need to be increased in line with international best practices. The proposed amendments to the BSP charter recently filed before the Senate are a positive step in this regard.

"The IMF will continue a close policy dialogue with the Philippine authorities in the period ahead in the context of post-program monitoring."